Bridge Financing refers to temporary financing that intends to cover a company’s short-term needs or costs until they secure regular long-term finance. Think of it as the bridge that connects a company to debt capital through short-term finances. Any institution that is in need to cover short-term needs can choose Bridge Financing. Usually, these loans can be taken anywhere from two weeks to three years.
How does it work?
When a company runs out of money, Bridge Financing fills the gap until that company gets their funds. This financing is mostly used to fulfill short-term needs a.k.a. working capital needs. You have several options for Bridge Financing, including debt, equity, and IPO. Here are the types of Bridge Financing:
Open Bridge Financing
-
Short-term
-
Immediate finance to the firm or entity in need
-
Higher interest rate
Closed Bridge Financing
-
Borrower carries a clear, credible plan
-
Guarantee of repayment, either by selling old residential property or through a mortgage agreement
-
Fixed date for repayment
Uses of Bridge Financing
Generally, firms borrow money through Bridge Financing to meet short-term needs, like providing a small amount of money to the company to carry out short-term needs or helping companies who are not performing well due to fund shortages or daily, working capital needs. For example, a business is running out of cash and needs $60000 for investing in the day-to-day activities of the business. They’ll approach the financial institution or venture to borrow, and look for the opportunity for Bridge Financing.
Advantages
-
Quick, instant processing
-
Helps manage short-term needs.
-
Improves the credit profile of the lender as they can lend money on time
-
Flexibility in the terms and conditions of such financing
Disadvantages
-
Carries a high rate of interest and can be expensive
-
Involves the risk from the side of the borrowers
